This discussion paper resulted in the article Broad and Narrow Bracketing in Gift Certificate Spending in the 'European Economic Review' (2014). Volume 66, pages 284-302.
We survey 1,050 consumers who have just redeemed one or more open loop gift certicates to learn whether they view gift certicate income, cash gifts and non-gift income as substitutes. We find that the majority (83%) of recipients spends the certicates in the same way as cash. The other respondents (17%) bought an item they would not have bought otherwise but adjustments in their shopping pattern do not seem to result from constraints in redeeming the certificates: 80% of all respondents in this group says they have used the certificate to buy an item they really love to have. While inconsistent with standard microeconomic demand theory, this behavior can be explained by narrow racketing: In spending gift certificates, these consumers consider a limited choice set of nice, personal items. Our data show that females are more likely to narrow bracket gift certificate income and that positive reciprocity towards the giver induces narrow bracketing in case the giver is a household member who suggests to buy a particular item using the ceriticate.
Previous studies have found that both giving in-kind gifts (Waldfogel, 1993) as giving gift cards (Oenberg, 2007) entail a welfare loss of 10-30 percent when compared to giving cash. We find that the welfare effects of open loop gift certicates among users are limited: The consumption of broad bracketing consumers is unaffected and narrow bracketing consumers seem to value the possibility to separate gift certificate income from other income sources.